The FOMC: We’re shutting down the helicopters soon

My Authors@Google talk is behind me, as is—sadly—my excellent free Google cafeteria lunch (tandoori sturgeon, lentil cakes, roasted potatoes, kale, some sort of coconut-tofu curry, rice and salad). Now I’m sitting in the lobby of Google’s SF office using the guest wifi network to check on the Federal Open Market Committee’s statement today. Turns out I was mostly right in my prediction that big news would be lacking. The statement wasn’t all that much of a change from June’s (the WSJ offers a full parsing of the differences, if you’re into that kind of thing).

But there was this:

[T]he Federal Reserve is in the process of buying $300 billion of Treasury securities. To promote a smooth transition in markets as these purchases of Treasury securities are completed, the Committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October.

Now the Fed had said before that the Treasury purchase program would go into the fall and then presumably end there. But now they’re saying it will definitely end there. Which is significant because Fed purchases of long-term Treasuries amount to what Ben Bernanke once famously called a “helicopter drop” of money (he was quoting Milton Friedman, but you never hear anybody talk about “Helicopter Milton”). It’s basically creating money out of thin air and financing government deficit-spending with it, and while it may be a good idea in a crisis (it’s a major element of how the U.S. paid for World War II), it’s something you really can’t afford to get in the habit of. Because if you do get in the habit of it, your currency eventually becomes worth less than the paper it’s printed on.

Kicking the habit, though, means that the federal government will have one fewer place to borrow from to finance its gigantic deficits. We’ll see how that goes.